U.S. Treasury report warns U.S. debt default would cause downturn worse than Great Recession

WASHINGTON — The U.S. Treasury Department is warning that the economy could plunge into a downturn worse than the Great Recession if Congress fails to raise the federal borrowing limit and the country defaults on its debt obligations.

A default could cause the nation’s credit markets to freeze, the value of the dollar to plummet and U.S. interest rates to skyrocket, according to the Treasury report released Thursday.

“As we saw two years ago, prolonged uncertainty over whether our nation will pay its bills in full and on time hurts our economy,” Treasury Secretary Jacob J. Lew said in a statement. “Postponing a debt ceiling increase to the very last minute is exactly what our economy does not need — a self-inflicted wound harming families and businesses.”

Treasury officials hope by laying out potential consequences they will be able to bring pressure on Congress to act. Lew has said he will have used up the extraordinary measures to avoid breaching the debt ceiling by Oct. 17. After that, the government will have around $30-billion of cash on hand. The report estimates that the money would be gone by the end of the day.

The report looked at the disruptions caused to financial markets during a similar stand-off between the administration and Congress over raising the debt limit. It then made projections about what could occur if there were an actual default.

In August 2011, Congress eventually raised the nation’s borrowing limit before a default occurred but only after a protracted debate. The politics that nearly led to a default prompted Standard & Poor’s to cut the nation’s credit rating by a notch.

“A precise estimate of the effects is impossible,” The New York Times reported on the contents of Lew’s brief, “and the current situation is different than that of late 2011, yet economic theory and empirical evidence is clear about the direction of the effect: a large, adverse, and persistent financial shock like the one that began in late 2011 would result in a slower economy with less hiring and a higher unemployment rate than would otherwise be the case.”

The Times also reported that several officials have privately indicated that they are worried the “repeated flirtations” with budgetary and financial crisis, have insulated the market from the very real possibility of a default.